The Truth About U.S. Stock Investment by Shigenobu Kawada: "Training in U.S. Stock Investing Through the Media" [Vol.6] Distributed on July 12, 2021
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Delivering the Truth About U.S. Stock Investments
Shigenobu Kawada's "Training for U.S. Stocks in the Media"
［Vol.6］Distributed July 12, 2021
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***Table of Contents***
Market Recap
This Week's Top Picks
This Week's Featured Articles
Investment Tips
Kawada's Walk
Activity Information
Q&A Corner
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1. Market Recap (July 5 – July 9)
Major Indices
• Dow Jones +0.2%
• S&P 500 +0.4%
• Nasdaq Composite +0.4%
＝ Quick Version ＝
Concerns about a renewed spread of COVID-19 and slowing economic growth were offset by a risk-off stance that benefited long-term yields, leading to gains in growth stocks. Although there was a substantial intraday drop on Thursday, indices closed near all-time highs.
＝ A Bit More Detail ＝
Global concerns about renewed COVID-19 spread persisted, and other economic indicators, such as June's ISM Non-Manufacturing PMI, fell short of expectations, fueling the view that economic growth had peaked. This led to a drop in long-term yields through Thursday after rising earlier in June as investors repositioned toward value and infrastructure stocks. Explanations included demand and supply dynamics (bonds being repurchased by investors) and expectations of slower late-year growth. Still, by mid-late week, long-term yields fell to February levels, helping growth stocks attract buyers again. From the June FOMC minutes, expectations for policy changes remained low, further pressuring yields lower. Regulatory tightening on Chinese tech firms caused Chinese equities to slump, supporting risk-off sentiment, but by weekend, rotations back into cyclical/late-cycle names helped the major indices make new highs.
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2. This Week's Top Picks
A column delivering essential information you should know.
The U.S. stock market has been on a strong run. After the long weekend for the 4th of July, ahead of the major earnings season, I expected a softer tone, but concerns were easily brushed aside and the major indices closed at all-time highs. However, trading volume was light, which is a point of attention.
Last week, I cited three potential catalysts for a pullback: (1) rising long-term rates, (2) lack of surprises in corporate earnings, (3) renewed COVID-19 cases. (3) materialized in parts of Europe and Korea, but at present the impact appears limited. Most importantly, the current U.S. environment shows little renewal of spread, which matters most. (1) was the opposite; inflation pressures had risen into mid-June, then positions betting on higher yields were unwound (leading to renewed long-duration bond buying) and overseas demand helped. The macro outlook suggested weaker growth later in the year, which contributed to a shift back toward growth stocks as yields declined. (2) will begin in earnest this week. Financials are leading the way, with JP Morgan Chase and Goldman Sachs announcing results before the opening on Tuesday; Wednesday brings Bank of America, Citigroup, Wells Fargo; Thursday sees Bank of New York Mellon; Friday features State Street and Charles Schwab. Financials had been pressured by lower rates, but dividend increases and shareholder returns provided support. Also of note this week is Taiwan Semiconductor Manufacturing Company (TSMC) on Thursday.
There is potential for further gains after earnings, but this may be the last leg of the rally before the summer break. There will be long-bond auctions this week, and long-term yields may ease back for a while.
In this context, consider rechecking your portfolio and selling stocks that look overbought or that have recovered to levels where you could cut losses emotionally. As mentioned last week, taking a relaxed approach and "taking a break from the market" is important to prepare for what comes next. With psychological space, you can also create a list of “watchlist” stocks and plan your next buying points.
Major Indexes Stock Price Table
S&P 500 Index – Last 12 Months
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3. This Week's Pick-Up Articles
A corner that selects and ranks information useful for asset formation from what I found, and comments with a very personal view.
【1】 Nikkei Newspaper 7/5Borderless Finance (Part I) Settlement and Lending, Non-Financials Take the Lead
Walmart, Apple, link with fintech
Non-financial businesses such as retailers that embed financial functions into their services—“embedded finance”—are beginning to spread worldwide.
I think embedded finance is hard to remember but will become an important term. However, in Japan, it will likely settle as embedded finance.
In embedded finance, three players appear: ① the business company that provides the service to users, ② fintech firms called “enablers” that connect systems between the business company and financial institutions, and ③ financial institutions that hold licenses.
Finance is a strategic industry in every country, so regulations are strict and obtaining a license is a high hurdle. By smartly combining licenses and technology from existing financial institutions, new services are being created. This marks a transformation from a vertical model where a business enters finance by investing time and money, to a horizontal model where businesses and financial institutions are connected by API technologies and fintech developments. The article also introduces several investment targets, which may be helpful to reference.
【2】 Nikkei Newspaper 7/5The 27 Years of Amazement and Threat: Bezos to Step Down as CEO
Amazon.com, Inc. was founded in 1994 and went public on Nasdaq on May 15, 1997. Since listing, market capitalization has grown about 3,800-fold. Founder Jeff Bezos will step down as CEO on July 5. The article summarizes the trajectory of these 27 years in ten numbers. Following this charismatic leader will not be easy for anyone. Whether stock prices reflect this uncertainty, since last autumn the stock price growth of other platforms has outpaced Amazon.
【3】 Nikkei Newspaper 7/8Stock Market: Break Free from Relying on Authorities
In the June 29 issue, Makoto Kajihara argued that “We should shift from dependence on government to a nation-building of enterprises,” stating that many established firms like Toshiba and Mizuho have relied on bureaucrats who regulate, and that this must change.
The July 8 article notes three points where the same applies to the securities market.
First, excessive confidence in Japan. Public pensions are assumed to account for 25% of total assets in both Japanese and foreign stocks. The ratio of investment in Japan should be around the share of Japan in advanced economies’ GDP, about 10%. Even a 10% asset allocation is questionable; Japan’s market cap is about 9% of global equities, so with 50% in stocks, 9% is only 4–5% of total assets; 10% seems quite high.
Second, the structural reform of the stock market. In the Prime market representing Japan, even “tiny” firms with market cap around 10 billion yen would be included by global standards.
This is a crucial point. The minimum market cap for inclusion in the S&P 500 is around 900 billion yen. Global institutional investors are unlikely to view companies with market cap around 100 billion yen as proper investments. We want more companies with market caps in the trillions to draw funds from global investors.
Third, Bank of Japan's purchases of ETFs. This is a symbol of the low quality of Japan’s market.
Here lies the position of Japan’s stock market. The pros and cons of directly injecting money into the market to influence stock prices have already been debated since the 1990s. Yet when one is forced to buy, the fundamental issue of the Japanese economy remains.
【4】 Nikkei Newspaper 7/10
The Tokyo Stock Exchange is planning a market reorganization in April 2022, and many listed companies are concerned about which market—Prime, Standard, or Growth—they will belong to.
Based on stock prices at the end of June, the TSE notified on July 9 which market each company falls under; of the 2,191 companies currently listed on the TSE First Section, about 3.3/10 or 664 companies will not be in the Prime market.
This topic is being covered by Nikkei and economic magazines, but it feels odd. The Prime entry itself seems to have become the objective. The purpose of the TSE was to promote corporate growth and attract overseas money by clarifying each market’s role, and for Prime to tighten listing standards and serve as a market brand. However, to get into Prime, some companies have been forced to increase outside directors or have major shareholders sell shares, which may look like a mere attempt to save face.
If a company has real growth power, capital will naturally come. Even with formal arrangements, foreign investors’ eyes are strict; capital does not simply flow because it is Prime. Also, is a market cap of 100 billion yen too small for Prime? A 1 trillion yen cap in the U.S. would be considered mid-cap or smaller. Interestingly, the U.S. has recently had five companies with a trillion-dollar market cap, illustrating the scale difference.
On the other hand, in reality, if there is no call from the authorities, little progress occurs; thus, considering governance and company reforms, this may be a step forward. Also, if a company no longer meets listing standards, expulsion without a grace period may be necessary and important.
【5】 Nikkei Newspaper 7/10“Concern about China’s AI: Interview with former Google CEO Eric Schmidt”
This article offers extremely important insights for our future social life and stock investments.
① Closer to the U.S.—faster than expected
In some AI and quantum computing technologies, China’s capabilities are rising faster than the report anticipated, which is a significant matter.
② Leading-edge semiconductors, expectations for Korea
“Even with the U.S. spending huge sums, it won’t become like Taiwan soon.” Meanwhile, the U.S. must maintain a lead of two generations against China in semiconductor manufacturing technology. Also, Korea’s Samsung is undervalued in semiconductor manufacturing technology.
③ The future U.S.-China relationship
“It’s wrong to insist on treating China as an enemy and severing all relations, including trade.” Citing healthcare and climate change, it’s possible to cooperate in areas that are not strategically critical. Such relations can be described as a “competitive partnership,” with many areas where cooperation with China is possible.
④ Opposition to GAFA breakup
There is strong opposition to regulatory proposals for GAFA (Google, Amazon, Facebook, Apple) worldwide, arguing that breaking up companies would reduce competitiveness against China and would not help. This view is stated clearly.
With these important insights in mind, you should not part ways with U.S. platform companies in your portfolio. Nasdaq-100’s constituent stocks include these important names with sizable weights.
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4. Investment Tips
A corner that not only covers “investment methods” and “stock ideas,” but also “indicators and statements that caught my eye” and “social and political movements.”
Gaining mastery of asset formation takes time and experience
As introduced recently, in the U.S. asset formation for individuals is dominated by stocks and mutual funds that track stock indices like the S&P 500 through passive funds or ETFs.
On the other hand, younger generations and beginners are drawn to individual stocks, options, and short-term crypto trading. Robinhood Markets (HOOD) filed for an IPO on July 1 and has gained overwhelming support from younger generations as a pioneer of zero-commission trading.
Below, I share thoughts on the relationship between young/beginner market entry and the fundamental path of passive investing.
■ U.S. online brokerage accounts
Robinhood’s accounts are 18 million. The industry leader Charles Schwab (SCHW) has 32.1 million accounts (as of May), and Fidelity Investments has 29 million (as of end of Q1), indicating rapid growth.
However, the median Robinhood account balance is $240 (and the average is about $5,000), which is quite small. By contrast, Schwab’s household average investment amount was about $320,000 last year, and Fidelity’s is significantly higher.
■ Japan’s online broker accounts
How about Japan? SBI Securities reached 6 million accounts in March this year, and Rakuten Securities reached 6 million accounts in May. Rakuten had reached 5 million in about nine months in December last year, and since then added another 1 million in about five months.
Meanwhile, major brick-and-mortar firms’ accounts are shrinking. Customer ages are older, and many close accounts. Nomura Securities has 5.33 million accounts, and Daiwa Securities 3.03 million. Relative to population, this is much lower than Charles Schwab’s 32.1 million; of course, social context and investment landscape differ between countries.
■ Conditions needed for asset formation
As for Robinhood’s revenue, roughly half comes from options trading. Individual trades are small, but many young people and beginners engage in securities investing from a young age, learning through small successes and failures, which should build knowledge for asset formation and the right mindset for investing.
There are many paths to asset formation, and it’s fine for each person to have their own. My view is that the core path for building assets with stocks is not frequent small trades with small assets, but exposing an amount that each person can reasonably bear to market risks, and in this case, dollar-cost averaging or long-term holding of U.S. stock index funds offers the best odds of success.
■ It takes time and experience to become aware of the correct approach to asset formation
Nothing can be learned without experience, and asset formation is the same. Speculative short-term trading brings little productivity and low chances of success for many people. Yet many are drawn to it due to its “mysterious appeal.”
Then my “sound theory” of long-term accumulation and buy-and-hold may not resonate with young people and beginners involved in trading.
Nevertheless, I want to reiterate that trading and asset formation are different. If your goal in stock trading is asset formation, you should separate and distinguish speculative assets from genuine assets. However, mastering the discipline to make this distinction is difficult. Most people pay a high tuition in the form of substantial losses before they learn it. The reality is that many people won’t learn it without that tuition.
Young people, beginners, if you want asset formation to succeed, cultivate the discipline to maintain a long-term passive approach. Paradoxically, it may be better to engage in a lot of short-term speculative trades early on to acquire experience through small mistakes and successes, as this can be a shortcut to the path of asset formation.
Rakuten Securities announces 6 million total brokerage accounts
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5. Kawata’s Walk
◇◇ Monday morning at Hibiya Park◇◇
My weekdays mornings are busy and early. Morning meeting video recordings and regular meetings finish around 10 AM, so I get to the office after 10:30. But only on Mondays can I arrive around 7 AM. I’ve fallen for a morning walk and stretch in Hibiya Park. Last Monday it was drizzling and foggy, but under the trees the rain isn’t bothersome. I walk through the park, wet by the rain, perform squats and push-ups among the glossy green trees. Wonderful!
As for this park routine, before the COVID-19 pandemic I used to go to a nearby gym on Monday mornings. The gym has presumably reopened, but I haven’t returned. I find the stretches in the park so comfortable. It will get too hot to go eventually, but until then I’ll continue the park routine.
◇◇ Recently I’m into ◇◇
Shohei Ohtani in MLB is amazing. My interest in MLB began around 1995 when Hideo Nomo debuted with the Dodgers. I was stationed in Hong Kong then, as the internet was just starting to spread. On Saturdays at home, I could almost real-time track Nomo’s game on my newly purchased computer, which was very impressive.
Since then, many Japanese players have excelled in MLB, but the one who truly thrilled fans in Japan and the U.S. was Ichiro Suzuki. Seeing a small, lanky Ichiro dominate the American scene among big players was exhilarating. I recall a family trip to Seattle for a game during summer vacation. At that time, Daisuke Matsuzaka pitched for the Boston Red Sox.
Most recently, the 27-year-old two-way star is undoubtedly exceptional. His first year in 2018 was impressive, but injuries followed. He left Japan to pursue becoming “the best in the world,” and each report of his injuries made people wonder if Japanese players could compete in MLB. Yet in his fourth year, he finally seems to have become MLB-ready, and he is thriving without injuries for now.
It’s fascinating to root for Japanese players who seek opportunities abroad. Whether in sports, academics, business, or investment, it’s a shared theme. If you invest in U.S. stocks, you compete in the world’s market with global investors. It’s admirable that investors in Japan are striving with their minds. You might as well proudly promote the appeal of U.S. stock investing. Though that might be my own inference.
Digressing a bit, Ohtani is pursuing world-class status in baseball. For me, the site that tracks him is Nippon Sports News and the official MLB Angels website.
Official Los Angeles Angels Website
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6. Future Activities
◇July 13 (Tue) 8:00 PM Monex Securities Online Seminar How to Build Money in Old Age and FIRE in the U.S. Market?
◇July 21 (Wed) 11:00 AMStock Voices
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7. Q&A Corner
Question (Summary)
Last week, Chinese ride-hailing giant Didi Chuxing, which recently IPOed in the U.S., dropped sharply. Are U.S.-listed Chinese stocks a buying opportunity?
Answer
The Chinese authorities tightened regulations as if targeting Didi right after it raised a staggering $4.4 billion in funding. Didi’s IPO price was $14; it surged to a high of $18.01 soon after listing, then fell to a low of $11.00 on Thursday and closed at $12.03 on Friday.
U.S. investors’ interest in Chinese stocks appears higher than in Japan. Not only Chinese stocks but any company listed in the U.S. tends to be traded with the same mindset as domestic stocks. In Japan, they were largely treated as a “foreign sector” separate from Japanese stocks, but now that sector is nearly extinct.
Speaking of which, the sharp decline in Chinese stocks affects risk appetite in the market, and investor interest remains high. Barron’s this week discussed Didi’s fall and its impact on Chinese stocks.
The rebound on Friday may have been influenced by a value-driven move and inclusion in the index (FTSE Russell World Stock Index) from the 8th; whether the bottom has been reached is still unclear. With no clear sign of regulatory enforcement, it’s wise to avoid chasing a rebound for now given the uncertainties around Chinese authorities’ moves.
In the long run, the Chinese economy remains a global growth engine, and there is undoubtedly room for Chinese stocks to rise. Growth in high-tech sectors may even exceed U.S. expectations. Still, the likelihood of regulatory tightening makes individual stock risk hard to gauge.
Another concern is that most U.S.-listed Chinese stocks operate as variable interest entities (VIEs). In simple terms, a Cayman-based paper company lists in the U.S., but the paper company isn’t the actual parent running the business in China; profits are arranged via contracts. (Refer to http://www.nicmr.com/nicmr/report/repo/2016/2016aut14.pdf for details.)This structure allows China’s restrictions on foreign investment to be navigated (foreign investment ratios in domestic firms), but it remains a gray area. Didi and other Chinese stocks’ prospectuses caution about investor rights depending on regulatory moves in China.
In practice, the rights of U.S.-listed shareholders are unlikely to be severely restricted, yet there are many unpredictable aspects to Chinese authorities’ actions. It is a risk to consider, especially when investing in individual stocks.
As I always say, there’s no need to invest outside U.S. stocks unless you want to; in relatively safer Chinese stock investments, low-cost Chinese equity ETFs may be suitable.
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